High Volatility: Steelmakers will Switch to Monthly Deals

High-value product suppliers of car industry may change method of agreements

Specialised steelmakers, who supply high value products to the car industry, could be the first to switch to monthly contracts from quarterly agreements to reduce risks arising from increased volatility.
While this would be the first time that a crucial supplier to the auto sector will be moving to a monthly cycle, it would also leave room open for frequent product price revisions, say people directly involved with the industry. Specialised steel includes high value alloy that accounts for about a fifth of the total cost of a car.
In fact, the alloy steel companies have raised prices by about 25% in the past three months and are planning to revise upward yet again in April. "These are uncertain times. Both the buyers and sellers are scared to stay locked-in for longer periods," said Niraj Bajaj, chairman and managing director of Mukand Ltd, the largest alloy steel player in India.
"While this (the monthly contract) is not healthy, we hope stability returns soon," he added.
Mukand, like Kalyani Steel, Mahindra Ugine, Usha Martin and other alloy steel makers supplies vital components to the car and two-wheeler industry and is a major driver and indicator of the price of cars.
In most other sectors, the switch to monthly is being strongly resisted. Typically, a quarterly supply contract gives companies enough flexibility to devise production schedules and study price outlook for coming months. A monthly system would however make such schedules go awry. This is the reason that industries such as metals and power, are resisting the move by miners to switch to monthly contracts.
Since February, major global miners such as BHP Billiton and Rio Tinto have been forcing steel mills to shift to monthly contracts to arrest volatility in prices of coal. Prices of the mineral has fluctuated violently in the past three-to-four months due to tight supplies on floods in Australia and growing demand from steel and power generating companies in China and India. Spot prices of coking coal last month touched record levels of $300 a tonne when contract prices were at $225, forcing miners to back out of contracts and disrupt supplies.
"After 40 years of working with annual supply contracts, in March last, the global order changed to quarterly. Only a year has passed and already they are thinking of changing to monthly, which is too soon," said a Mumbai-based commodity analyst who is familiar with the move by alloy steel players.
The influence of alloy steel makers is evident. Car makers have accepted the switch and are making preparations to adopt the new system. Maruti Suzuki, the country's biggest car maker is still on quarterly contracts, but wouldn't delay in making the jump. "Monthly contracts will make predictability higher and we can forecast better," said Mayank Pareek, executive officer (marketing and sales), Maruti. But the previous contracts also had scope for revisions. According to Mr Bajaj, the earlier contracts had provisions for revision in prices after every month. "The story on raw materials is similar for us too. Hikes in prices of iron ore, coal and other minerals have led to a cost push and we are forced to raise prices," said Mr Bajaj.
But along with raw material push, strong demand patterns too have contributed to the switch. When China emerged as the world's largest consumer of steel, its hunger for iron ore pushed up prices sharply and the annual contract system was replaced by the quarterly system. Increased volatility has again brought out similar demands.
The Indian alloy steel industry makes a total of 4 million tonnes annually, according to the Joint Plant Committee of the steel ministry.